STRENGTHS

Large gas and oil reserves (respectively second and fourth largest in the world)

Very low level of external debt

Strategic location in the sub-region

WEAKNESSES

High inflation

Social tensions

Unfavourable business climate

Risk assessment

Catch-up effect wanes

The catch-up effect that followed the lifting of international sanctions in 2016 gradually faded in 2017. Despite favoured treatment by OPEC, the increase in oil and gas exports was lower than in the preceding year. Growth was, however, maintained by the vitality of non-oil and gas activity – notably the manufacturing sector – and despite the continuing negative performances of the construction sector. This latter is nevertheless slowing less quickly, but is holding back investment growth, which made a negative contribution to activity.

The stabilisation of inflation has helped to sustain the level of household consumption, alongside increasing levels of employment. Growth is expected to increase slightly in 2018, driven by domestic consumption and investment, while inward foreign investment will fall. The decision by the US administration concerning the Iranian nuclear agreement and any sanctions that might be imposed as a result could limit FDI. The measures applied by the Central Bank to restore the health of the banking system will help the recovery in credit which has benefited from the cuts in interest rates in 2017. However, the level of uncertainty could result in the limiting of Central Bank support of the economic activity in order to halt the depreciation of the Iranian rial. In addition, the planned realignment of the official exchange rate with the market rate in 2018 would be postponed. Oil and gas production is expected to stabilise, with Iran committed to limiting any increase in its production to 90 thousand b/d. The rise in the price per barrel in 2018 will however benefit its export earnings.

An ambitious budget for 2018

The public accounts deficit continued in 2017. Oil and gas receipts were higher, but were still lower than had been expected by the government. Increased subsidies were also a burden on expenditure. The government’s aim of balancing the budget in 2018 seems achievable, given that it was based on a growth hypothesis of 6%. The public accounts are most likely to remain in deficit through 2018. Oil and gas revenues will continue to reflect rising oil prices but the contribution from the non-oil and gas receipts will remain limited. Expenditure is expected to remain at a similar level to that of last year but will be allocated as a priority to the continuing restructuring of the banking sector and to a lesser extent to social transfers. The public deficit will be financed using Iranian Treasury Bonds issued on the domestic market. While the level of public debt remains low, the size of the total public debt, (including the debts of publicly owned companies), has not been defined, and could be larger than the amounts as stated by the government.

The rise in oil and gas exports seen in 2016 helped consolidate the current account surplus. Imports remain limited under the shadow of possible sanctions hanging over foreign, – especially European – banks. The restrictions on the use of dollars for trade transactions are also a limiting factor on any expansion in trade and these restrictions could be made stricter. The government’s cooperation, policy however, remains extremely dynamic. The government, with the aim of diversifying its trading partners, is signing a range of cooperation agreements with countries in Eastern Europe and in Asia.

Popular uprising in Iran and risk of US sanctions

President Hassan Rohani was re-elected for a second term of office in the presidential elections held in May 2017. The electoral campaign was mainly focused on economic challenges. It found its post-justification in the large protest movement that started in the city of Mashhad in December 2017. Despite improved economic momentum driven by rural and working-class citizens who weakly benefited from the economic recovery, rallies denouncing fiscal austerity, the high cost of living, and corruption have multiplied throughout the country, and have been followed by a wave of arrests. In a context of slowing activity, the government’s position has been weakened, and it is also torn between a repressive response characteristic of the regime and respect for the moderate electorate that brought Mr Rohani to power. The protests against the President should also strengthen the position of some conservatives opposed to the nuclear deal and weaken the moderate fringes of the political spectrum, especially as the latest statements of Ayatollah Ali Khamenei are in line with a growing mistrust of the outside world. By asserting that it wants to withdraw from the joint action plan, the US also threatens the permanence of the nuclear agreement. Finally, the indirect confrontation with Saudi Arabia is expected to have an impact on domestic and foreign policy, because an upsurge in tensions would pose an increased risk to the stability of the entire region.